Kirsteen Maclean: Corporate insolvency/directors’ duties – a perfect storm
Kirsteen Maclean discusses the intricacies of corporate insolvency.
Research undertaken by the insolvency and restructuring trade body R3, in Scotland, revealed that the number of insolvency cases (liquidations and receiverships), for the last quarter of 2021, was 164 per cent higher compared to the same period the previous year.
Additionally, the Accountant in Bankruptcy reported that in May 2022 there were 93 company insolvencies in total, 82 per cent higher than May 2021 and 19 per cent lower than May 2019. Total corporate insolvencies in Scotland, in May 2022, consisted of 19 compulsory liquidations; 68 creditors’ voluntary liquidations ( CVLs) and 6 administrations.
There are various reasons for these increases, with the most obvious being the withdrawal of Government pandemic support measures, which included bounce back loans (readily accessible by directors with minimal diligence being carried out); the furlough scheme (with the resultant staff shortages now being seen in many industries), business grants and certain temporary taxation cuts.
There has also been the removal of the restrictions imposed by the Corporate Insolvency and Governance Act 2020, on presenting liquidation petitions to court.
The increase in insolvencies, therefore, needs to be seen in context. Although there may have been a substantial rise since this period last year, at that time insolvencies were, somewhat counterintuitively, at a very low ebb due to the measures referred to above.
It is, however, clear that, as well as dealing with the lasting effects of the pandemic, companies are facing pressure across their business with substantial cost inflation, together with the disruption being felt, supply chain and otherwise, as a result of the War in Ukraine. In addition, there are the continuing trading issues, as a result of Brexit.
The main driver for insolvencies will always be creditor pressure, the largest creditor by far being HMRC. How HMRC deal with companies will likely determine whether there is a sustained increase in insolvencies. HMRC are believed to be getting back to enforcement action. They will no doubt be dealing with a substantial backlog and we will need to see how this will play out.
With a focus on company directors, in terms of the Corporate Insolvency and Governance Act 2020 the threat of personal liability for ‘wrongful trading’ was temporarily removed from directors (claims in relation to wrongful trading are relatively rare), which may have led to a misconception that all of the usual duties a director must think about, had also slipped into lesser focus. However, the more common claims e.g. gratuitous alienation, unfair preference, unlawful dividends, misfeasance and breach of fiduciary duties have remained relevant throughout – resulting in issues arising for directors, who may have believed otherwise.
It remains to be seen if all of this will culminate in what has long been predicted could become a perfect storm, in relation to insolvencies and claims against directors.
When such issues do arise, it is important that advice is sought early. BTO advise creditors and debtors on all forms of insolvency and directors who may be facing issues in relation to breach of duties etc.
Kirsteen Maclean is a senior associate at BTO.